Thursday, July 30, 2009

Proposed TFSA Upgrades

The Tax-Free Savings Account (TFSA) is a useful new tool for Canadians to reduce future taxes, but the $5000 limit per year makes them of little use to wealthier Canadians. Helping Canadians of modest means is an admirable goal, but you can count on wealthier people to complain.

This brings us to Malcolm Hamilton’s proposal for retroactive TFSA room of $5000 per year back to age 18 (proposal details here). Jon Kesselman gave a counter-proposal to give older people more TFSA room each year than young people get (the web page with this article has disappeared since the time of writing).

Both of these proposals amount to a transfer of future wealth from young to old. To put a finer point on it, because only wealthier people can make use of large amounts of TFSA room, these proposals would transfer wealth from the young to wealthy older Canadians.

Only self interest could blind people to the obvious flaws in the justifications offered for these tax changes. One commenter, yvrapx, made some intelligent observations:

Recall the people he proposes get higher limits are the same folks who depending on their age were not taxed on capital gains before '72, at all. ... From the mid 80's until '94 there was a $100,000 lifetime capital gains exemption for all types of property; that exemption no longer exists. My point is the people he wants to give a break to are the same ones who have always been given a break.

Being a baby boomer of above average means myself, these proposed TFSA changes would likely help me. But, I don’t want it done on the backs of my children.


  1. I tend to agree with the "being fair to the younger generation argument". What I would rather see that would be fair to everyone, is a very large boost in the annual TFSA amount, say to $20,000 per year, and the elimination of the RRSP.

  2. What about letting people use unused RRSP contribution room for their TFSA? That would help lower-income people near retirement who weren't able to use their RRSP due to the threat of massive clawbacks on their withdrawals.

  3. For older Canadians, 5000 dollar inflation adjusted limit for annual TSFA is still very good.

    At the age of 65, money from RRSP can be taken out and contributed to TSFA. There is still a lot of time to contribute to TSFA for most people including Baby Boomers.

    I think changes will be made to TSFA. In fact, I think the contribution limits might be decreased instead of increased in the long run so that government will get more in taxes.

    For example, a person with a 50k income gets to contribute both 9k to RRSP and 5k to TSFA. In the US, a person with a 50k income gets to contribute to 5k to a traditional IRA or 5k to a Roth IRA (professionals recommend Roth IRA in most cases). As in this hypothetical example, the contribution room in Canada is 2.8 times larger than the US. RRSP will be taxed eventually, but the contribution room in Canada right now is fairly high already.